Income Share Agreements vs. Federal Income-Based Loans

We recently began accepting applications for our hybrid income share agreement trial program.  So far, the question we have been asked the most is how our program differs from the federal government’s income-based repayment loans.  The primary difference is that one is in essence a loan while the other is a true income share agreement.

Ok, so what does that really mean?

With the federal government’s program, your payments are indeed based on a percentage of income, but the underlying product behaves like a loan: if your earnings-based payment is not high enough to cover your required payments under the repayment schedule, your balance increases accordingly.  In essence, it is what we call in the finance industry a negatively amortizing loan.

For example, let’s say to pay down your loan over 10 years, the required monthly payment is $500.  However, your income-based payment says you only have to pay $400 a month based on your earnings level and the associated percentage of earnings agreed upon.  The extra $100 difference is added to the loan balance and continues to compound interest.  In the long-term, this will cost you more, potentially a LOT more.  This type of deferment is similar to option ARM mortgages for home financing and PIK loans for corporate financing.

So, to summarize, you are expected to pay the entire balance over the life of the loan, but the actual amount you’ll end up paying will vary and may be a lot more than you had anticipated.

Some may think that the federal government provides complete relief for individuals who can’t pay the entire balance over the life of the loan through loan forgiveness.  While this is true, many also fail to realize that the amount forgiven is treated as taxable income and is taxed accordingly. For example, if you have $100,000 in loans remaining and you are in the 30% tax bracket, you will get a knock on the door from Uncle Sam asking for $30,000.

As for true income share agreements, there may be a set maximum amount you may have to pay over the life of the contract, but that does not mean that you will necessarily pay that amount.  You may pay up to the maximum amount if your future income is high enough, but you may also pay below it if it’s not.

For example, if your income share agreement calls for 120 monthly payments and you make 120 payments, it does not matter what the maximum amount paid ends up being, YOU OWE NOTHING ELSE.  It does not matter when you make those 120 payments, if you defer or not, YOU DO NOT OWE ANYTHING MORE.

To see how this works for you specific circumstances, apply for our trial today and we can walk you through the details of how a FitBUX Income Share Agreement works.

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